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The Role of Monetary Policy in Turkey During the Global Financial Crisis

Selim Elekdag and Harun Alp

No 2011/150, IMF Working Papers from International Monetary Fund

Abstract: Turkey is an interesting case study because it was one of the hardest hit emerging economies by the global financial crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating the fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) decreased policy rates by an astounding 1025 basis points over the November 2008 to November 2009 period. In this context, this paper addresses the following broad question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recent recession have been? Counterfactual experiments based on an estimated structural model provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the interest rate cuts implemented by the CBRT and exchange rate flexibility both helped substantially soften the impact of the global financial crisis.

Keywords: WP; monetary policy shock; monetary policy; demand shock; financial accelerator; Bayesian estimation; DSGE models; financial crises; sudden stops; Turkey; emerging economies; emerging markets; inflation targeting framework; interest rate rule; rule coefficient; open economy; rate of exchange rate depreciation; Exchange rate arrangements; Exchange rate flexibility; Global financial crisis of 2008-2009; Inflation targeting; Conventional peg; Global (search for similar items in EconPapers)
Pages: 74
Date: 2011-06-01
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